Thursday, January 29, 2009

Out of 435 representatives, only a handful had the fortitude to stand up to the multi-trillion dollar bailouts from both Bush and Obama. In honor of Ted Poe speaking the truth about the incredible debt this country is going to be buried under, I bring his two speeches on the two bailouts.

One of the primary problems in any policy question is how to deal with externalities, the non price costs/benefits of enacting a policy. Some examples include pollution, noise, increased or decreased value, etc. Well while riding my bike I came across a perfect example of an externality and the problem with policy's not truly reflecting the costs versus the benefits.

Here in San Antonio, the city decided last year to stop euthanizing dogs at the pound. This movement was headed up by wealthy women from areas where dogs are strictly regulated such as the posh old money nighborhood of Alamo Heights. So these women, who I will refer to as party A, the benefit of being able to appease their morality is greater than the cost to them, which is close to zero. On the other side of town, in the poor areas of the southwest, citizens who wish to walk or ride their bike encounter feral dogs on a regular basis. For these people, let's call them party B, the benefit to the policy is close to zero and the cost is much higher due to their being no space to put newly found strays in the shelter since the space that would be freed up by euthanization is taken.

Why is it that party A is able to pass a law which helps a very tiny minority of people while hurting most individuals? Simple, the role of money internalizes the cost for the city councilors representing the poor areas. The money from party A offsets the costs in potential lost voters from party B, so the MB>MC so the motion passes. The second reason is that while many poor people are adversely affected by having rabid dogs wandering their neighborhoods, they do not vote to reflect this. Thus the sum of all MB>sum of all MC when it comes to voting.

As a result, poor policy decisions occur which hurt most individuals, but politically make sense. This often leads to the titular law of unintended consequences as the poor decisions spill over into other areas such as the increased number of strays from a no kill policy, increased housing prices due to homeownership programs, and increased health care costs due to insurance.

Tuesday, January 27, 2009

Thursday, January 22, 2009

In today's Senate confirmation hearing, Treasury Secretary Timothy Geithner talked about how restoring the banking system could require spending "trillions of dollars." The result of such a large scale increase in the money supply is that inflation will occur due to the formula known as the Exchange of Equation. This formula, MV=PQ states that the number of dollars in circulation(M) times the number of times they change hands in a year(V) is equal to the average price of all goods sold during the year(P) times the number of goods sold during the year(Q). By definition velocity is relatively constant and only moves greatly during a recovery or a depression when people are afraid to spend money.

Using this formula, by increasing the money supply X dollars means that those X dollars are spread out by the percentage change in the money supply equalling the percentage change in price. The previous statement presupposes that Q is unchanged or drops, which is likely given the economic slowdown occurring. As a result, those trillions of dollars in new spending will end up translating into fractions of dollars and cents on goods to spread out the increased money supply over the goods produced and sold in the country. (If Q increased it would be simple arithmetic to find if P rose or fell by having %(delta)M=%(delta)P+%(delta)Q) A little inflation is a given in an economic system because goods are scarce so over time the value should rise do to increasing marginal costs to produce.

When the money supply greatly increases relative to GDP growth, however that is when problems occur. When that happens the costs of doing business increase faster than a firm can deal with so people get laid off or their real wage falls.

Wednesday, January 21, 2009

Well the next chapter in the struggle to get a good biking experience continues as I borrowed a bike, which was also made in China, and rode my customary 8.25 mile trip. This bike seemed worlds apart from the previous bike, despite the fact that it was purchased at a lower price and used.

For starters, the new bike had solid metal on the entirety of the pedals and on the gears. As a result, I could ride it uphill offroad without fear of the pedals breaking off. Secondly, it was built much heavier and was a much easier bike to ride offroad as a result because it got a lot of momentum from the weight. Finally, the wheels kept the air better than the other bike, which is nice because I am a big rider so I pump them up every couple of runs.

In conclusion, the difference between the two bikes is most likely due to very different specifications between factories. This is one of my theories as to why there are so many recalls of Chinese products, since many American companies likely will not put total effort into product specification as they figure it is cheaper to have a few recalled than to increase the labor costs by having more training for the workers.

As far as the bike is concerned, I found a local bike repair place, so I shall just get the parts changed out for better quality Western components. The good part of the story is that I have a greater appreciation for the differences in bicycles and have gotten into the habit of casual bike riding.

Today's ridiculous corporate piracy story comes out of Gannett Newspapers where the president is playing in a charity golf tournament on the company dime. Of course this comes after the company laid off 3,000 workers over Christmas. Naturally the same golfer released a phony sympathy memo at the same time going a little something like this :

"As all of you are painfully aware, the fiscal crisis is deepening and the economy is getting worse. Gannett’s revenues continue to be severely impacted by this downturn, and our local operations are suffering. While we are doing our best to reduce all non staff-related expenses, I am sorry to report that we must do another round of layoffs across our division.

Ahh, I wonder how many jobs that golf trip cost. Naturally, after the AIG scandalous parties and the pay to the CEO of Lehman Brothers nothing surprises me these days. Using the CEO pay database and comparison tool, I saw that the compensation for the CEO of Gannett was 314 times that of someone making an entry level salary of $42,000. To put it another way, it would take an entry level worker 314 years, or 4 lifetimes to make as much as the CEO makes in a single year. I guess I better work on that reincarnation gig if I hope to be able to keep up.

Tuesday, January 20, 2009

Well the Bush regime has finally ended and the Obama one begun, so here's to four new years. Watching the helicopter take Bush to Andrews Air Force base, I noticed something I never saw in the other changings of the guard--people cheering that the previous president was leaving. Also, I found it a bit ironic that the senator who used to be a member of the KKK collapsed during the inaugural luncheon for the first African American/biracial president. Obama now has the unenviable job of dealing with a decaying global economy and cleaning up the mess left behind by decades of deregulating the financial system and dismantling the mechanisms to police the financial world brought on by four terms of Clinton and Bush.

Sunday, January 18, 2009

As the end of the Bush years draws closer by the minute I have noticed show after show about this legacy. The chorus from all but the most partisan individuals seem to put him in the bottom half of the presidential lists, so this got me thinking as one who has done a lot of studying of history and politics to consider the validity of statements such as the one by historian Robert Mcelvaine on whether Bush justifiably is the worst president so far:

Like a majority of other historians who participated in this poll, my conclusion is that the preponderance of the evidence now indicates that, while this nation has had at least its share of failed presidencies, no previous presidency was as large a failure in so many areas as the current one.

Arguing with these sentiments definitely proves to be something above both my paygrade, to quote the incoming president, and would be an affront to my belief in using reason. On the domestic front Bush had many failures, which all stem from a basic inability to govern and instead takes the worst of all approaches by compromising to appease nobody but special interest. Let us take the case of the response to the 9/11 attacks as just one example of this ineptitude. Rather than beefing up domestic security in vital infrastructure such as actually checking the cargo coming in at ports, Bush instead set up a giant bureaucracy in the Department of Homeland Security. Since the new jobs created by the bureaucracy such as the TSA airport screeners were unionized, the Democrats signed off on the creation of the DHS along with the very questionable Patriot Act. Now the government became too busy making sure that travellers were not carrying four ounces of liquids on planes or not patriotically reading the proper books. We are not any safer as a result, but billions of dollars were spent in a knee jerk reaction which took in many people, myself included in the days following September 11. The list of failures to accomplish anything meaningful for the American people is long during these eight years, from dealing with illegal immigration to the social Security System to bailing out billionaires.

Now for the hard part, to find achievements of Bush's to contrast with the myriad failures of the past eight years. Among his better acts was the increased funding for NASA, which not only improved greatly human understanding, but it is also a way to increase the prestige of the US around the world with such wonders as the Hubble(and soon to be Webb) telescopes, the ISS, and the manned space program. The only other positive act from this administration that immediately comes to mind was the product of Bush meeting one of my favorite world leaders, Lula da Silva(president of Brazil), in Rio de Janeiro. There Bush finally removed the tariffs on Brazilian ethanol, which is produced much cheaper than the corn ethanol in the US and opened up trade with one of the world's future economic powers.

In light of a brief examination of the Bush years, where would I rank him among presidents? The answer follows below with an explanation of the presidents below him:

39-Bush40-Warren G. Harding-had cabinet members selling the oil reserved for the Navy for personal gain41-William Henry Harrison-died shortly after taking office, so nothing was done42-Andrew Johnson-His refusal to grant civil rights during his term made reconstruction much more acrimonious.43-Andrew Jackson-Removed the Cherokee and Creek Indians to gain the gold on their land, in violation of the Supreme Court. He destroyed the banking system of the US by removing the second national bank. Why he is on the twenty dollar bill is still a mystery to me.

Wednesday, January 14, 2009

I am angry, to say the least. Yesterday while riding my bike, I was nearly at the halfway point of my eight mile ride and I push down on the pedal and the pedals move and the wheels do not. I inspected, thinking that the chain was off, and discovered that the pedals were broken. The crank which drove the chain broke off next to the pedals. Now, this was even more infuriating since this was maybe the tenth time I had ridden the bike. Naturally, I went to see where this was made, and naturally it was made in China.

Suddenly, the absolute lack of workmanship made perfect sense. In order to save a fraction of a cent, some greedy individual outsourced the factory from some small town in America to China. Since the Chinese use slave labor, this made perfect sense from the bottom line. After all, if you can pay $300 a month to a Chinese worker, why would you pay $300 a week to an American one? Further, to reduce the cost of shipping from Asia back to the American markets, the cost will be great, so the incentive to reduce weight is paramount. Therefore, the American firm will tell the Chinese supplier to cut down on the amount of material used for certain parts, which will reduce each unit by half a pound, which saves tens of thousands of dollars in fuel costs. This of course means that the quality of product is reduced because the probability of product failure is increased, the risk of recall goes up, and the consumer satisfaction goes down. However, the elites will always tell you that people like buying Chinese goods since X number of billions of dollars a year are spent on them. When goods such as casual use bicycles are only made in China, how is that any kind of an endorsement? It's like saying that the local utility is doing a good job because it's monopoly is the most used source of power in the city.

It is the most disheartening because these poorly made trinkets are being bought by generations not yet born. With a larger and larger share of the national debt going to interest on treasury bonds and more and more deficit spending, the burden of these cheap products will be borne by new generations. Why can people not see that we are paying interest on these cheap pieces of crap from China each year, so they are not a better deal?

Monday, January 12, 2009

I promise to put up more posts in the second half of this month. I have been waiting until after the inauguration to discuss the upcoming economic policies of the new administration as they are revealed.

The worst part is not just just that the incompetent are in high positions, but that they are recycled from one prominent position to another. Without an infusion of new blood, the country stagnates and the incentive to work hard drops off since your effort does not matter since an unqualified MBA from Harvard, or a connected buffoon will get the top jobs.

Thursday, January 1, 2009

At long last the year of losing half of my stock investments ended. Now we will be entering the pivotal reporting period when the retail numbers for December come out, which will really see if this recession has legs. If the numbers point to a huge drop in retail sales and major retailers go bankrupt, then the unemployment rate will shoot up in the double digits nationwide and cause some serious panic. If the number are not a big change from last year than we will have dodged one bullet. Let us see when the numbers come out what happens with the retail numbers.

In the news today, the legislative author of the subsidized federal loan passed away today. In memoriam I will soon put up an economics lesson on the effect of subsidies on price and output showing why student loans cause the price of college to rise very quickly.

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